Business Context and Reporting Period
Company: Wound Management Technologies, Inc. (WMT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2013
Business Overview: WMT markets and sells the patented CellerateRX® activated collagen products for wound care through its subsidiary, Wound Care Innovations, LLC. The company is also pursuing resorbable orthopedic products through Resorbable Orthopedic Products, LLC. The company is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2013 |
|---|---|---|
| Revenues | $415,693 | $790,417 |
| Cost of Goods Sold | $229,695 | $444,785 |
| Gross Profit | $185,998 | $345,632 |
| Gross Margin | 44.7% | 43.7% |
| Net Income (Loss) | $(32,336) | $(974,601) |
| Cash and Cash Equivalents | $136,307 (as of June 30, 2013) | |
| Total Current Assets | $1,053,097 | |
| Total Current Liabilities | $5,310,566 | |
| Derivative Liabilities | $1,225,776 | |
| Notes Payable (Current) | $2,722,554 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 54% for the three months and 111% for the six months ended June 30, 2013, compared to the same periods in 2012. This growth is attributed to the strategic launch of CellerateRX Surgical powder and expanded hospital distribution.
- Operating Expenses: General and Administrative (G&A) expenses increased 22% for the quarter but decreased 47% for the six months compared to 2012. The 2012 six-month period included significant one-time costs for reacquiring distributorship rights and reorganizing the sales force.
- Bad Debt: Bad debt expense decreased 96% for the quarter and 93% for the six months, as the company stopped accruing interest on questionable notes receivable.
- Interest and Debt Costs: Interest expense increased 66% (quarter) and 68% (six months) due to a shift from equity-compensated financing to traditional interest-bearing debt. Conversely, debt-related expenses (non-cash equity compensation) decreased 48% and 58% respectively.
- Net Loss vs. Gain: The company reported a net loss of $974,601 for the six months ended June 30, 2013, compared to a net gain of $257,855 in the prior year. The 2012 gain was driven by a $2.67 million non-cash gain on the change in fair value of derivative liabilities, whereas 2013 recorded an $82,128 loss on derivatives.
Guidance, Outlook, Risks, and Unusual Items
- Strategic Agreements: WMT executed a five-year agreement with Academy Medical to sell wound care products to VA and military hospitals, with a sales quota starting at $600,000 in year one and growing to $3 million in year five.
- Capital Needs: The company anticipates needing to raise additional capital to bring new products to market. It has received $569,000 in advance subscriptions for a planned Series C Preferred Stock offering.
- Going Concern: The filing includes a "Going Concern" warning. Current liabilities exceed current assets, and the company has a stockholders' deficit. Continued operations depend on obtaining additional funding.
- Legal Proceedings:
- SEC Settlement: The company settled an SEC complaint regarding alleged stock manipulation and paid a $20,000 civil penalty in January 2013.
- IRS Settlement: An offer of compromise regarding 2004-2005 payroll tax liabilities was accepted in February 2013, resulting in a write-off of approximately $192,000 in accrued liabilities.
- Active Litigation: Ongoing disputes with Ken Link (alleged usury and breach of contract) and Tonaquint, Inc. (forbearance agreement on a $560,000 note).
- Unusual Items: The financial results are significantly impacted by the fair value adjustments of derivative liabilities (warrants and convertible notes), which are classified as liabilities rather than equity due to insufficient authorized shares.
Investor Verification Checklist
- Liquidity Position: Verify the company's ability to meet current liabilities of $5.3 million with only $136,000 in cash and $1.05 million in total current assets.
- Debt Structure: Review the terms of the $2.7 million in current notes payable, many of which are past due or have high interest rates (up to 18% on some notes).
- Derivative Liability Volatility: Assess the impact of the $1.2 million derivative liability on future earnings, as fair value changes can cause significant non-cash gains or losses.
- Revenue Sustainability: Confirm the progress of the Academy Medical contract and whether the 111% revenue growth is sustainable without further capital infusion.
- Legal Contingencies: Monitor the outcomes of the Ken Link and Tonaquint litigation, which could result in additional cash outflows or equity dilution.